Overstock.com 2008 Annual Report Download - page 49

Table of Contents
(gross profit dollars less sales and marketing expense) increased 23% to $85.3 million in 2008. Contribution as of a percentage of
revenue was 9.0% and 10.2% in 2007 and 2008, respectively. Contribution increased by 43% in Q4 to $27.2 million, an $8.2 million
improvement due primarily to lower marketing costs. The following table represents our calculation of contribution (in thousands):
Three months ended
December 31,
Twelve months ended
December 31,
2007 2008 2007 2008
Total revenue $ 294,516 $ 255,862 $ 765,902 $ 834,367
Cost of goods sold 248,134 212,252 641,352 691,458
Gross profit 46,382 43,610 124,550 142,909
Less: Sales and marketing expense 27,377 16,437 55,458 57,634
Contribution $ 19,005 $ 27,173 $ 69,092 $ 85,275
Contribution percentage 6.5% 10.6% 9.0% 10.2%
Commentary—Technology and G&A costs. Our combined technology and G&A costs were down 5% to $96.2 million for fiscal
2008. Technology costs fell 3% to $57.8 million from $59.5 million in 2007 as we offset falling depreciation expense with IT
development and related staff in 2008.
G&A costs decreased 9.0% to $38.4 million for the year 2008 from $42.0 million or $3.6 million. The primary reduction in G&A
expenses year over year is primarily due to a $4.1 million decrease in bonuses accrued in 2008 (including our decision to not pay
senior executives and company-wide profit sharing bonuses). In addition, the performance goal described in the Performance Share
Plan (the "Plan") was not attained as of the end of the year ended 2008 and $1.0 million in total compensation expense accrued under
the Plan was reversed. This year over year decrease was offset in part by an increase of approximately $1.5 million related to
consulting costs and professional fees. Technology/G&A costs have been falling over the last few years; we expect that trend will
reverse in 2009 as we invest in development and corporate staff and projects.
Commentary—Operating loss. Overall, our operating expenses, including sales and marketing, technology/G&A and restructuring
were down 9% for 2008 and down 29% for Q4 2008 compared to the previous year. Our resulting operating loss for 2008 was
$10.9 million, a 76% improvement from $44.6 million in 2007. For the three months ended December 31, 2008, our operating profit
was $5.7 million, $12.5 million better than the $6.8 million operating loss during the same period last year. The 2007 operating loss
includes $12.3 million of restructuring costs ($6.1 million in Q1 2007 and $6.2 million in Q2 2007). We did not incur any
restructuring costs in 2008.
Commentary—Other income (expense), net. For the year ended 2008, other expense was $1.4 million and included a $2.8 million
gain on the retirement of $9.5 million of 3.75% Senior Notes, a $3.9 million loss on settlement of notes receivable and a $300,000
other-than-temporary impairment of marketable securities.
Commentary—Adjusted EBITDA (non-GAAP). Adjusted EBITDA (a non-GAAP financial measure) for fiscal 2008 was
$15.1 million, $25.5 million better than the $(10.5) million in 2007. For the fourth quarter of 2008, Adjusted EBITDA was $9.9
million, a $10.4 million improvement from ($415,000) in Q4 2007. In 2008, capital expenditures were $18.7 million, while
depreciation expense was $22.7 million. We believe that a discussion of Adjusted EBITDA at this stage of our business is useful to
investors, as Adjusted EBITDA is a reasonable measure of actual cash used or cash generated by the continuing operations of our
business. See "Non-GAAP Financial Measures" below for a reconciliation of Adjusted EBITDA to net income (loss).
Commentary—Balance Sheet Items. We ended the year with $109.6 million in cash, cash equivalents and marketable securities,
compared to $147.4 million at the end of 2007. Working capital decreased to $39.7 million from $62.6 million. The difference is
largely the result of $20 million of stock repurchases and debt retirement and $18.7 million of capital expenditures.
We ended the year with $17.7 million of inventory (including inventory in-transit of $2.8 million), a decrease from the $25.6
million of inventory (including inventory in-transit of $3.1 million) we had at the end of 2007. We were able to turn our inventory
more frequently due to more efficient inventory management and maintaining a more attractive product selection.
Commentary—Cash Flows (non-GAAP). For the year ended December 31, 2008, we generated $2.0 million in cash inflows from
operations compared to cash inflows of $10.0 million during 2007. "Free Cash Flow" (a non-GAAP financial measure) for the three
months ended December 31, 2007 and 2008 totaled $55.3 million and $39.4 million, respectively. For the years ended December 31,
2007 and 2008, free cash flow was $7.3 million and $(16.7) million. See "Non-GAAP Financial Measures" below for a reconciliation
of Free Cash Flow to net cash provided by operating activities.
Commentary—Debt Repurchase Program. At December 31, 2008, $67.5 million of our 3.75% Senior Convertible Notes due 2011
were outstanding. On February 17, 2009 our Board authorized us to spend up to $20.0 million to repurchase Senior Notes. To date we
have spent $3.0 million under the new debt repurchase program.
The balance of our Management's Discussion and Analysis of Financial Condition and Results of Operations provides further
information about the matters discussed above and other important matters affecting our business.